Stretching your savings dollar when rates are low

Stretching your savings dollar when rates are low

While home owners around Australia might be rejoicing, the Reserve Bank of Australia’s (RBA) latest cash rate decision will leave savers with not much to celebrate. The RBA board decided on April 7 to leave the cash rate unchanged at the record-low rate of 2.25 percent, which means another month of ultra low interest rates for savings accounts. 

In fact, it seems avid savers won’t have higher rates to look forward to any time soon — in his statement, RBA governor Glenn Stevens hinted that the cash rate is likely to fall even lower in the future.

All of this might leave Australians scratching their heads and wondering what to do with their savings. In addition to comparing savings accounts and finding one with the most advantageous rate, there are alternatives that you can take to make your savings dollar go that much further.

Slash your debts

At first, you might not think of paying down debt as saving money. But getting yourself out of the red and back in black is like an inverted form of saving — you’re preventing yourself from falling deeper into the debt hole by accruing lots of interest.

A period of low interest rates is an ideal time to get rid of as much of your ‘bad debt’ as possible — consumption debt, like credit card balances, or the total you have left on a car or personal loan. According to the Australian Bureau of Statistics, the average debt for both vehicle loans and other consumption loans in 2011-12 was $19,500 each  — hardly a number to scoff at. The income you would have put toward your savings or making interest repayments can instead go toward whittling this down.

Zero in on your home loan

Speaking of debt, a low interest rate environment is also a good time to service your ‘good debt’. In this case, we’re talking about the largest bit of ‘good debt’ you likely have — a mortgage. Rather than squirrelling money away into a savings account, an alternative destination for your money could be a 100 percent offset account on your home loan. The more of your hard-earned savings you put into here, the smaller your home loan balance, and the less interest you have to pay. 

In essence, you’re investing in your home, with the knowledge that as you pay it off over time the equity in the property is steadily growing. This equity can eventually be used to serve the same purpose as a savings account, including bankrolling your retirement or even being used to fund certain large purchases, with the right loan attached. Plus, you can always withdraw the money in the offset account in emergencies.

Shop around for some high-interest alternatives

There are a variety of high interest savings accounts out there that can prove useful when rates are low. Most people think of term deposits, but there are a number of alternatives that can help your savings really stretch. 

In March 2014, Roy Morgan reported that the number of Australians with such accounts climbed by 1.5 million people over the preceding five years. That’s a 44 percent increase. One of these options that has proven increasingly popular is the bonus interest or reward account, which provides a bonus rate of interest on top of the normal rate if certain conditions are met. This could be anything from refraining from withdrawing to depositing a certain amount each month.  

Become a super saver

For a lot of people, their savings will go toward funding their lifestyle once retirement rolls around. If interest rates are low, it may therefore also be a good idea to simply stash more money in your super — your savings will ultimately end up in the same place anyway, after all.

Consider entering into a salary sacrificing arrangement with your employer, whereby the portion of your future pay cheque that would have been your savings goes instead to your superannuation account. You’ll not only have more in the kitty when you decide to hang up your hat, you’ll also be paying less tax. And if you’ve picked a growth investment option for your super, you could even see these funds grow at a significantly faster pace.

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Learn more about savings accounts

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Should I open multiple savings accounts with UBank?

UBank offers customers an opportunity to make the most of their savings by opening multiple savings accounts. Having multiple savings accounts with UBank may be ideal for savers tracking different goals in separate accounts. 

It’s important to note that to earn bonus interest, you will still need to meet the conditions of the UBank savings account every month. If you don’t make these deposits, you will receive the standard interest rate, which is typically lower. 

Keep in mind that you won’t earn bonus interest on your UBank savings account in the month an account is opened and if you open multiple savings accounts with UBank, you'll start earning any bonus interest the following month. 

It's also not yet known how long the special interest rate will hang around for, so please check with your bank for more information. 

Can you have multiple ING savings accounts?

Yes, you can open up to nine accounts with ING at any particular time. If you’re saving money for various goals, such as buying a car or taking a holiday, you can name each of your multiple ING savings accounts differently.

To get a Savings Maximiser account, you’ll need to deposit more than $1000 every month and make at least five additional purchases. If you also want to grow your savings, from 1st March 2021, you can earn up to 1.35 per cent per annum variable interest on one account with a balance of up to $100,000 when you also maintain an Orange Everyday account.

With ING, multiple savings accounts can help keep track of all your savings goals. All the accounts offer flexible withdrawals where you can withdraw as low or as high as you want without impacting your earning interest rate. However, you can only earn the bonus interest on one account. To apply for a Savings Maximiser account, you can visit ingdirect.com.au.

What is an ANZ locked savings account?

An ANZ locked savings account locks your money and prevents you from spending. You may use a standard savings account as the account where your salary is deposited. You can then withdraw funds when needed, but aren’t able to make purchases with it. However, this account may not grow much as the continual withdrawing of funds will limit the interest you can earn.

With a locked savings account in ANZ, you know your savings will grow because you can’t access the money. You can also qualify for a bonus when you deposit at least $10 per month and don’t make any withdrawals. To help you with this further you can set up an automatic transfer from your regular ANZ savings or transaction account so you don’t forget to make a monthly deposit.

Your ANZ locked savings account offers you a base interest rate of 0.1 per cent per annum plus an additional bonus interest of 0.49 per cent per year. The interest is calculated daily and credited to your account on the last working day of the month.

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

  • Depositing a fixed minimum amount into the account every month.
  • Making a fixed number of deposits each month.
  • Making a minimum or no withdrawals each month.
  • Maintaining a minimum account balance.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

What is a Westpac locked savings account?

The Westpac locked savings account (also known as "Westpac Life") can help customers reach savings goals faster through bonus interest. Customers receive 0.2 per cent standard base interest with a variable bonus rate of 0.35 per cent when the closing balance at the end of the month is higher than the opening balance.

There are some conditions to earn the bonus interest on Westpac's locked savings account, though. First, you’ll need to increase the balance each month either through a deposit or not making any withdrawals, and then link it to a Westpac Choice account and make at least five eligible payments using your debit card. Please consult your bank as to what an eligible payment is. 

What are the two types of NAB locked savings accounts?

With a locked savings account in NAB, you can earn bonus interest and learn financial discipline. NAB offers two types of locked savings accounts, each with their own terms and conditions.

The NAB Reward Saver account pays a variable base interest rate of 0.05 per cent per annum and a bonus interest of 0.55 per cent. You’re eligible for the bonus if you make a minimum of one deposit on or before the second last banking day and have no withdrawals in the month.

Meanwhile, the NAB iSaver account provides 0.05 per cent as the standard base interest rate and a fixed bonus margin of 0.55 per cent during the first four months from the date of opening the account. You can park your cash in the account and enjoy unlimited monthly transfers between linked daily bank accounts without impacting the interest rate.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.